Enbridge (ENB), Spectra Energy Finalize Definitive Agreement

Enbridge Inc. (NYSE:ENB) and Spectra Energy (F:SEP) Partners, LP (NYSE:SEP) announced execution of a definitive agreement. The transaction led to the conversion of Enbridge’s incentive distribution rights (IDRs) and general partner (GP) economic interests in Spectra Energy into 172.5 million newly issued SEP common units.

All of the IDRs have been eliminated as a result of the transaction. The 172.5 million newly issued Spectra Energy common units are worth about $7.2 billion based on the volume-weighted average price of the company’s common units over the past twenty days.

The transaction value indicates a multiple of 15.7x estimate 2018 GP/IDR cash flow and is anticipated to be breakeven to Spectra Energy‘s’ distributable cash flow per common unit by the second half of 2019 and will be accretive thereafter.

Enbridge holds a non-economic GP interest in Spectra Energy and owns about 403 million SEP common units. This corresponds to about 83% of Spectra Energy’s outstanding common units.

Spectra Energy’s common unitholders derive significant benefits from the transaction. The removal of the IDRs is expected to boost Spectra Energy’s competency and growth potential by permanently improving cost of capital, thereby improving value for both Spectra Energy unitholders and Enbridge.

The transaction also simplifies Spectra Energy’s capital structure and supports the interests of all unitholders. Spectra Energy maintains its current guidance of 7% distribution growth in 2018 and 4-6% distribution growth in 2019-20, distribution coverage of 1.1x to 1.2x and a strong credit profile of sub 4.0x Debt/EBITDA.

The transaction closed immediately after the signing of the definitive agreement.

Price Performance

Enbridge’s shares have gained 1.4% compared with the industry’s rally of 5% in the last three months.

Zacks Rank & Key Picks

Enbridge carries a Zacks Rank #3 (Hold). A few better-ranked players in the energy sector include Pioneer Natural Resources Company (NYSE:PXD) and Denbury Resources Inc (NYSE:DNR) . Both these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered at Irving, TX, Pioneer Natural Resources Company is an independent oil and gas exploration and production company. The company delivered an average positive earnings surprise of 67.62% over the preceding four quarters.

Headquartered at Plano, TX, Denbury Resources is engaged in the exploration, production and development of natural gas properties. The company pulled off an average positive earnings surprise of 125.00% during the same time frame.

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